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Don’t Dump on Free Trade

The new Supreme Court term is so far more notable for cases denied review than those actually on the argument calendar, and it has otherwise been overshadowed by both the election and the financial crisis.

Even the most interesting-sounding cases—such as the “fleeting obscenity” case, Federal Communications Commission v. Fox Television Stations, which one could be excused for thinking has something to do with the First Amendment—somehow come down to technical questions of administrative law.

One seemingly “boring” case, however, involving anti-dumping regulations of all things, is the opposite: What on the surface is a dry parsing of statutory definitions in the end implicates not just larger issues of international trade but also antitrust law, energy policy, national security, and the government’s role in ordinary commercial activity.

On Tuesday, Nov. 4, while most of the country understandably had its attention elsewhere, the Court heard argument in United States v. Eurodif. The case is an appeal from a ruling of the U.S. Court of Appeals for the Federal Circuit holding that contracts with foreign companies to enrich uranium are outside the scope of U.S. anti-dumping law (and their corresponding tariffs) because they’re “service” as opposed to “sales” contracts.

The decision reversed the Commerce Department’s determination to the contrary and prompted a petition for certiorari from United States Enrichment Corp., a government spinoff that dominates the domestic enrichment market and would be hurt by competition from abroad. Although the U.S. solicitor general also requested cert (in which circumstance review is not uncommon), Eurodif is the first time the Court has accepted an international trade case in six years (and only the eighth time in the last two decades).

Why, then, is this case of such importance that it warrants the Court’s intervention? Not to put too fine a point on it, but in these uncertain times, Eurodif stands at the crossroads of our political debates over how to grow the economy while doing right by workers. If foreign service contracts are all of a sudden subject to regulatory premiums, not only will international trade be hit, but all companies that have lowered costs by outsourcing parts of their operations will face legal uncertainty—and consumers will pay higher prices.

Goods And Services?

“Dumping” is similar to the antitrust concept of “predatory pricing,” whereby a company allegedly sells goods at less than their “fair value” to drive its competition out of the market and then obtain monopoly profits. (Both dumping and predatory pricing claims are controversial as a matter of economic theory, but that’s a different article.) In the context of international trade, an exporter of goods who prices them at less than this so-called fair value “dumps” those goods on the importing country.

Under the U.S. anti-dumping law, 19 U.S.C. §1673, the Commerce Depart­ment may impose duties on “foreign merchandise [that] is being, or is likely to be, sold in the United States at less than its fair value” when such “dumping” causes or threatens to cause material injury to a domestic industry. In 2001, Commerce determined that low-enriched uranium (LEU, a critical component for nuclear power) from France was thus being dumped and imposed a duty on LEU imports.

The controversy is that American utility companies—the respondents in the case, along with the French enrichers—acquire most of their LEU not by buying it abroad, but by “separative work unit” orders. In these transactions, a utility delivers to the enricher a quantity of unenriched uranium (known as a “feed,” which it has acquired elsewhere) and then pays for the conversion of feed into LEU. So what they effectively purchased from France here is enrichment services, not goods in the sense of “foreign merchandise”—or so the respondents successfully argued to the Federal Circuit.

A Dangerous Position

Numerous economic studies have shown that anti-dumping law is facially contrary to free trade. It protects domestic special interests from the rigors of global competition and results in higher prices for U.S. businesses and consumers.

In this case, any duties added to LEU would drive up the cost of one of the more reliable sources of energy—just as the nation wants more noncarbon-based energy for financial, environmental, and even geo-strategic reasons. The ultimate result of these duties may be to harm all U.S. citizens—individuals who face their own hardships in this economic downturn and shouldn’t be forced to subsidize USEC through higher utility bills.

USEC argues that the Commerce Department should be allowed to impose anti-dumping duties on service transactions when those transactions result in the importation of a tangible product—even though they do not involve the sale of that product at less than fair value. The government adds that the purpose of anti-dumping law is to protect U.S. industries and their workers from “unfair” competition, even if a sale of goods hasn’t occurred.

These attempts to extend anti-dumping law to service transactions have four principal dangers:

Judicially amending the law. A ruling in the government’s favor subjects imports of services that result in tangible products to duties when the applicable statute unambiguously declines to cover services. A new Congress with a new president may choose to change the law, of course, and it might do so in response to this case, but that’s a policy decision that shouldn’t be imposed on the nation by the courts.

Retaliation. The government arbitrarily hurts our trading partners, who could in turn burden the export of U.S. services—a large and growing part of the economy.

Unpredictability. The government position creates uncertainty about which transaction Commerce considers when it determines whether dumping has occurred—the service order or the subsequent sale of merchandise. The government could then pick and choose among transactions on which to base complaints, perhaps focusing on outsourcing to India or China, as a way to maximize receipts from duties.

If importers do not know whether Commerce will look at the service transaction or the downstream sale, they cannot know which price to set to avoid dumping tariffs. U.S. companies that produce goods through foreign contracts would suddenly be more vulnerable to dumping claims based on the price negotiated for the manufacturing alone.

Maintaining a monopoly at consumers’ expense. Commerce is acting to protect a government monopoly to the detriment of the free market system and more open trade. Ever since USEC was privatized in 1998, it has been trying to use dumping laws to exclude European companies (including filing this case in 2000). Both the nuclear enrichment industry and the overall economy would be better served by open competition than by a monopolist’s attempts to insulate itself from more efficient providers.

Hurting Consumers

Contrary to the claims of some protectionists, anti-dumping law does not bolster America’s national security. Instead it increases procurement costs, diverting funds from other worthwhile programs and stifling innovation among domestic companies. Although the United States may have a security interest in maintaining domestic enrichment capability, any subsidies that USEC requires should come from the normal appropriation process and not through a hidden tax on all foreign LEU.

For that matter, it is unclear why such enrichment needs to be done by a government monopoly rather than by regulated private energy companies akin to defense contractors.

The government and USEC lob final volleys to the effect that without a decision in their favor, Russia—not a party to these proceedings, but home to enrichers that will be affected by this case—would ramp up LEU production, crowding out U.S. investment in enrichment capabilities (while keeping its stocks of weapons-grade uranium instead of converting them to nonmilitary uses). But it is Congress’ job to rewrite statutes that might be harmful to national security, not the courts’—and here, the president already has statutory authority to regulate, for security reasons, the trade of any property in which a foreign country has an interest.

Fundamentally, we should not enforce laws that impose higher prices on American consumers. Nor should we take steps that undermine the competitiveness of American companies doing business abroad. But that is exactly what the government is doing when it demands that special duties be placed on imports that supposedly are priced “too low.”

The Court seemed of two (or nine) minds during oral argument, but if it finds in the end that uranium enrichment is subject to tariff, the entire range of foreign service contracts will be exposed to anti-dumping abuse. Such a decision could raise costs throughout global supply chains, as the Obama Commerce Department uses anti-dumping laws to punish outsourcers.

That would be an unfortunate result. Eurodif may not have received much attention on Election Day, but given the threat to U.S. business and all our interest in promoting commerce during difficult economic times, it is one of the term’s most important cases. Those who want true competition and benefits to consumers should hope that the government loses and, accordingly, that freer trade wins.